KUALA LUMPUR: CIMB Research said it is likely that Hartalega
’s 4Q16 ended March 31, 2016 will come in below expectations due mainly to weaker average selling prices (ASPs).
The research house said on Friday that it gathered from Hartalega’s management that net profit will be in the region of RM60mil-65mil (excluding forex gains), versus its expectations of RM70mil-75mil.
This includes lower net margin of 15.5% - 16% despite growth in overall sales volume.
“We think this can be attributed to weaker ASPs, particularly in Mar, and increase in operating expenses (i.e. hiring of new engineers, sales personnel and higher gestation cost for NGC),” it said.
The drop in ASPs is likely due to pricing pressure, mainly from its existing customers. With more capacity coming on stream from Phase 1 (+9.4bil pieces), the group was forced to sell new incoming capacity at lower ASPs.
ASP was also eroded by intensifying competition, as overall sector capacity rose significantly in the second half of 2015. CIMB considers the current ASP to be the base case as Hartalega is likely to raise prices to pass on additional costs from weaker US$ and increase in raw material prices.
Given the more competitive environment, the group is delaying the installation of new lines in Plants 3 and 4. It originally intended to install two lines every month but has slowed this down to two lines every 1.5 months, with installation due to begin in August 2016.
CIMB only expects full-year contribution from Plants 3 and 4 by end-2018. It is positive on the delay, as it reduces pressure on the group to sell incoming capacity and allows it to wait for better supply-demand equilibrium.
Given the expected weaker set of upcoming 4Q16 results, CIMB lowered its EPS forecasts by 7.2%-11.1% in 2016-2018 to account for lower ASPs, increase in operating costs, and further delays in contribution from Plants 3 and 4.
“That said, we expect that the group will continue to record healthy 3-year EPS CAGR of 11.5%,” it said.
It maintains a Hold call on Hartalega with a lower target price of RM4.25. “We think that the negative newsflow has been priced in at this juncture and we view Hartalega as a long-term play, given its strong fundamentals and superior technology in the nitrile (NBR) gloves segment. Switch to Kossan for better earnings visibility and undemanding valuations,” it said.
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